WILLIAM REES-MOGG: How China's millions can save the West

The world has been turned upside down. Until last September, many people assumed the world was facing a normal recession, perhaps longer than usual, but nothing worse than had quite recently been experienced. In that September, the Bush administration tested the proposition that Lehman Brothers was 'too big to fail'.

That description is applied to banks whose size in the world banking system means their failure would damage the whole system. This was seen as a disaster that rational governments could not afford.

Under US Treasury Secretary Henry Paulson, President George W. Bush's treasury team decided to let Lehman go; they then found that the catastrophic theory was correct.

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Cartoon of Wen Jiabao with Gordon Brown and Barack Obama in the background

Perhaps they had assumed Wall Street was unsinkable. Perhaps it is unsinkable; though much damaged, it has not sunk yet.

But the immediate consequences, with which the financial world is still struggling, were panic and dislocation. Economists are coming to regard the recession as the greatest economic disaster since the Thirties.

Many people are also worried whether the capitalist economic order, which has underpinned the extraordinary growth of the world economy, has now been so overstressed as to be beyond repair.

They think some new structure, perhaps a modification of capitalism, will have to take its place.

Economic historians know we have been here before. In the Thirties, many people, some of whom became fascists, some communists, believed democracy was no longer a viable system of government.

Only the powers of a dictator, they said, could overcome the evil of mass unemployment.

Others said capitalism had collapsed because of its internal contradictions; capitalism, they thought, would rapidly destroy itself. Communist leaders expected to bury the free economy, and were surprised when their own system collapsed.

A revolution may be taking place as we wait. What does seem to be happening is a great shift of power from West to East.

Until the end of the Cold War 20 years ago, the world was still dominated, politically, culturally and economically by the Western powers, and they were led by the United States. Even at the height of the Cold War, the Soviet Union could not match the strength of the Western economies.

In the post-war period, the United States was always stronger than the Soviet Union and infinitely stronger than China.

I remember my first visit to China in 1977, shortly after the death of Chairman Mao, a monster comparable to tyrants such as Hitler or Stalin. Some sense of Chinese culture did survive the cultural revolution, though Mao had tried to complete his Marxist revolution by smashing everything that remained of the old civilisation.

I remember a lecturer in English literature at Beijing University who had recently returned from ten years' compulsory labour as a peasant and resumed his course of lectures on the novels of Jane Austen. I thought he was a hero who showed that civilised values could survive.

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But the China of 1977 was a grim place, a universe of matching Mao suits and old-fashioned bicycles - impersonal, anti-human and bureaucratic.

Since the energies of China were set free in 1980 by the reforms of Deng Xiaoping, the Chinese economy has grown by an astonishing eight per cent per year, much faster than the United States. At that rate the Chinese Gross Domestic Product doubles every nine years; it has, in fact, grown by about eight times since 1977.

By contrast, the Western world is fighting a global recession in which almost all the Western economies are shrinking.

The Chinese Prime Minister, Wen Jiabao, has taken a realistic line about China and the recession. He has been criticised for promising another year of eight per cent growth, but he did not disregard the obstacles.

He said last week: 'The global financial crisis continues to spread and get worse: demand continues to shrink on international markets, the trend towards deflation is obvious, and trade protectionism is resurging, but as long as we adopt the right policies and implement them effectively, we shall be able to achieve this target.'

The markets were hoping he would provide a further stimulus - on top of the £400billion stimulus that has already been supplied - to the Chinese economy. If needed, a further Chinese stimulus can come later; it is the eight per cent that is the real commitment.

Before the recession began, China was already growing much faster than Japan or the major Western powers. One of the most important facts about the world recession is that China is the only one of the world's four largest economies still growing.

It is natural to think of recession as a purely negative process, in which wealth is destroyed and unemployment rises.

Perhaps the most important counter-argument is contained in Joseph Schumpeter's great book Business Cycles, first published in 1939. He believed recessions are a necessary part of the process of growth.

Schumpeter first used the phrase 'creative destruction' to describe the process by which recession releases resources and clears the ground for innovation to occur. He also observed that innovations are always associated with the rise to leadership of 'New Men'.

If New Men can play their part in taking advantage of opportunities that arise in periods of recession, why should not recessions provide opportunities for 'New Countries'; that is exactly what China has now become.

There is nothing to prevent an old nation becoming a new nation for the purpose of innovation and growth.

I'm impressed by America's response to the world recession, even though the Bush administration made every mistake in the book - and some it invented for the occasion. American culture is resilient.

I admire China's reaction even more. So far, China has kept out of recession, despite the impact it has had on Chinese exports.

Recessions always cause suffering, but China has seen that this recession can also be an opportunity for growth.